Business Models Analysis Of Finnish Food Retailers - Case K-chain, S .

1.3 Earlier research on business models Business models have reached a broad spectrum of research in the past. Researchers have concentrated in different kinds of business models by investigating old and new possible business models. Moreover tools for analyzing BM as well as terminology and ontology have been widely researched over. Also, business design, strategy, concepts, tactics and innovation have been quite thoroughly researched in the recent years (ZOTT AND AMIT, 2010; CASADESUS-MASANELL AND RICART, 2010; CHESBROUGH, 2010; MCGRATH , 2010; MAGRETTA, 2002; TEECE, 2010; OSTERWALDER, 2004; OSTERWALDER ET. AL, 2005). However, there is not much literature and research done of a new ‘’niche’’ food product entry in the Finnish market. But, there are journals about different kinds of innovations in retail business models. Additionally, research has been done of food retailing and about retailing innovations in a globalizing retail market from both retailers and customers’ perspective (SORESCU ET AL. 2011; GEUENS ET AL. 2003; REINARTZ ET AL. 2011; SHANKAR ET AL. 2011). Finally, MORCHETT ET AL. (2006) have investigated competitive strategies in retailing. So basically, there is rather much research and information regarding the literature of this current thesis topic. In this paper, we aim to study the Finnish food market and the BMs of grocery retailers in Finland, in order to determine right sales channel for a new food manufacturer (Baba Foods) with its new products. Research GAP There is a lot of relevant research and articles about business models in different areas and perspectives. So overall, business models theories and business model ontology as well as strategy, design etc. has been researched quite thoroughly (OSTERWALDER ET AL. 2005; CASADEUS-MASANELL., RICART, 2010; ZOTT., AMIT., 2010; OSTERWALDER., PIGNEUR., 2010; CHESBROUGH., 2010; GUNTHER MC GRATH., 2010; SORESCU., ET AL., 2011). However, there is not a research done about current Finnish food trade business models (look at case companies) and an analysis or comparison of which channels would be the most favorable for small food manufacturer to enter 5

the grocery market with its new products. Moreover, in this research we want to determine compatibility between Finnish retailers’ business models and most favorable sales channels for Baba Foods’ new products. 1.4 Finnish grocery industry review In this part we are looking at the food retail industry in Finland. More specific, we are concentrating on three biggest grocery retailers in Finland: Kesko Food Trade (Kchain), SOK Food Trade (S-chain), and Lidl Finland. These main three companies represent the key players in Finnish retail and grocery business. Moreover, they all have different business models and especially strategy that they are using someway for gaining competitive advantage and increasing their market share (MORSCHETT ET AL. 2006). From the point of Baba Foods these players are always looking for products that will bring them some competitive advantage. In Baba Foods they believe that their niche products are something that could bring grocery shops this competitive advantage. Generally the competition in grocery retail business is between five entities: K-Group, S-chain, Suomen Lähikauppa, Lidl, and others. (FINNISH GROCERY TRADE, 2014) K-chain is one of the leading providers in the trading sector services in Finland. It was founded 1940 and it begun its operations one year later. Nowadays they operate in many different industries including grocery, home and specialty goods, building and home improvement, and car and machinery businesses. Moreover, it employs more than 45 000 people and its revenue in 2013 was 9 315 M and operating profit 230 M . In the grocery shop its revenue (4387 M ) increased and in the other fields decreased in the year 2013. Finally, K-chain has about 2000 stores engaged in chain operations in Finland, Sweden, Norway, Baltic countries, Russia and Belarus. (KESKO ANNUAL REPORT, 2013) SOK (S-chain) is the other leading company in the retail and service trades in the Finnish market. Likewise K-chain, S-chain also competes in multiple industries; however, they both have slightly different areas of businesses they are competing in. S-chain provides services in the grocery and consumer goods, service in stations 6

and fuels, tourism and hospitality, automobile and auto accessories and in agricultural trade. In the grocery business S-chain is the biggest competitor of KGroup and other players have only a small share of the grocery and retail market. Schain’s revenue in 2013 was 8 539 M , operating profit 226 and they have approximately 42 000 employees. (SOK ANNUAL REPORT, 2013) Lidl is a German grocery chain company which operates internationally in 25 countries in Europe. It arrived to Finland in 2002 and nowadays it has 141 stores in all Finland. Moreover, Lidl operates in Finland as an independent subsidiary, Lidl Finland Ky. Lidl’s revenue in 2013 was 960 M and it has approximately 4000 employees. Lidl has succeeded to gain market share basically every year since it came to the Finnish market. At present, Lidl has about eight percent market share in the grocery business whereas K-Group has 34% and S-chain 46% being the market leader. (LIDL SUOMI KOMMANDIITTIYHTIÖ, 2013) Due to the complexity of K-chain’s and S-chains’s businesses we are narrowing down our analysis and comparison only for the grocery business which is also the only relevant one from Baba Foods’ perspective. However, the business models are analyzed as a whole, because otherwise we cannot determine the big picture. Market shares of grocery shops in Finland 2013 1% 1% 1% 1% 1% S-ryhmä 46% K-ryhmä 34% 7% Lidl Suomi Ky 8% 8% 46 % Suomen Lähikauppa Oy 7% Stockmann 1% Tokmanni-konserni 1% 34 % M-ketju 1% Minimani 1% Muut yksityiset 1% Figure 2: Market share of grocery shops in Finland 7

According to Finnish Grocery Trade Association (PTY) statistics, S-chain and K-chain have a duopolistic situation in the Finnish grocery trade in 2013 withholding together about 80 % of the all market (Figure 2). S-chain is the biggest player in the Finnish grocery trade by holding 46% of all market, Kesko hold 34% of the market. The trend has been in the last decade that S-chain has succeeded to increase its market share in the business. Lidl on the other hand has only a bit more than 8% of the market share but it does not try to penetrate the market share too much. Now it has 141 stores in Finland and its goal is to have not more than 150. So basically, Lidl is aiming to be and stay profitable and to keep its market share steady. However, in the last three years Lidl has succeeded to increase its market share over 3%. (FINNISH GROCERY TRADE, 2014) According to the Nielsen Company’s annual report Suomen Lähikauppa has now approximately 7% of the market and Lidl has 8%. In 2013 groceries we sold altogether with over 16,5 billion Euros. Additionally, Siwa chain (Suomen Lähikauppa) has been cut down strongly; however they still have the most shops in Finland with over 500 shops in all country. According to the research institute of the Finnish economy in spite of the centralization of the Finnish grocery stores the competition is in fair levels. The different companies compete with each other in importing, so the centralization does not necessarily mean higher prices which have been a concern for the consumers in the last years. Many different researches suggest that the grocery prices in Finland are one of the highest in the world. (FINNISH GROCERY TRADE, 2014) 1.5 Introduction of Baba Foods Oy Baba Foods Oy was founded in February 2014 as a small family business owned by five shareholders. Baba Foods has three direct sales channels: primarily (B2B) to grocery shops like food retailers with varying size, secondly direct sales (B2C) to 8

circle of friends and web sales (www.baba.fi) and thirdly catering business to both private customers and companies. Baba Foods recipes is based on Chef Avi’s know-how and experience in the food business over 40 years. Baba Foods started with three cutting edge products but during the year 2014 Baba Food was producing seven products for grocery shops and all together over 10 products for its customer range. The current products are: Baba Hummus, Chili Hummus, Antipasto, Baba Ganoush, MinttuCoiso, Olive paste, Harissa, Mustard, Baba Falafel, Bulgur salad and other seasonal products like potato salad etc. Baba Foods products are handmade in Helsinki, genuine, fresh and local food. Moreover, all the products are milk-free, lactose-free and most of them gluten-free too. Baba Foods uses only fresh and quality raw ingredients. The products represent mainly the eastern Mediterranean regime diet with a touch of Finnish flavor. Baba Foods currently concentrates sales on the market in Helsinki. It has 11 business customers as retailers (grocery shops 1.1.2015) which are the key retailers for consumers. In spring 2015 Baba Foods goal is to double the number of its distributors mainly by focusing on expansion in Helsinki area. Baba Foods used the first three grocery shops as its test market for its new ready to eat products. The test market was spring 2014 and the beginning of autumn 2014. Overall, the customer feedback and sales have relived that the products are good enough for the market and the products have potential market. Therefore, Baba Foods continues its expansion for potential retailers in Helsinki area for the year 2015. Now Baba Foods needs to determine a strategic move on which sales channels to concentrate on, especially when entering grocery retail market with new products as a small food manufacturer in the food industry in Finland. 1.6 Structure of the thesis In this thesis we are going through very straight forward the literature review as well as the business model concepts of the case companies. After this introduction 9

we are looking in section two into data and methods used in this thesis. In section three, we are researching business model literature, and what are relevant theories and concepts to use for our case companies. In section four, we are analyzing these three case companies by using the business model canvas to understand their business as whole, all companies are discussed and analyzed in separate subsections. Moreover, also Baba Foods’ business plan is looked over since it is important for understanding the big picture what comes between all the case companies and their needs. Section five reveals the main findings of this research and reveals a compatible table between the three grocery store case companies and Baba Foods. Finally in section six we discuss about the grocery business in Finland and Baba Foods possibilities as well as other similar manufacturers in the future. Section seven concludes the thesis and summarizes the research as well as have suggestions for further research. 10

2. Data and methods This is a qualitative research as the research topic is business model analysis of case companies and research question is: how to determine the right channel to enter the grocery retail market as a new supplier with new products in Finland. Therefore, the research method is based in multiple case study and on building a conceptual model which is outlined from Business model Canvas and then later developed to compatibility table for analyzing this multiple case study research question. Data sources used are documents and texts (e.g. journal, articles, thesis etc.), online material like annual reports and then finally interviews of Finnish Grocery Trade Association for objective view of relevant factors. Moreover, the all the shareholders has been interviewed too what comes to Baba Food’s business plan. Therefore the data analysis method used is based on comparison of the case companies and then developed for a compatibility table which weights the favorability and suitability of the three case companies for Baba Foods channel choice. We have used in this research the following evidence in the business model analysis for the three case companies as well as with Baba Foods: Notes from case companies including interviews, annual reports, documents such as journals and articles, tabular material and narrative. This evidence is sufficient for building up a competent compatibility table for analyzing the research question. 2.1 Qualitative research Qualitative data can be found from K-Chain’s and S-Chain’s annual reports 2013. Lidl’s data is collected from various sources, mainly from journals, articles and Lidl’s website since Lidl does not publicly announce any extra information from itself and it has not mandatory reporting while being a limited partnership (GmbH). All this data and information is used to build up the business model canvas of each retailer together with information from the interviews made with Finnish Grocery Trade 11

Association (PTY) and the representative of K-chain, S-chain and Lidl Finland. The interviews were made by questionnaire sent by email. The email was sent to six carefully chosen decision maker and top people in their field: - Ruokakesko’s general manager Jorma Rauhala, - HOK-Elanto Liiketoiminta Oy’s vice president Veli-Matti Liimatainen - LIDL’s general manager Lauri Sipponen and sales manager Virpi Kaikkonen - Finnish Food Trade Association’s general manager Kari Luoto and manager Ilkka Nieminen Four out of six of the respondents answered to the questionnaire based on business model and other relevant questions related to the research questions. The two that did not answered where Lidl’s manager Mr. Sipponen and sales manager Mrs. Kaikkonen. Also Ruokakeskos’s general manager did not answer himself to the questionnaire, but instead Ruokakeskos HR Business Partner Marja Lähteenmäki gave some answers. Also an important objective answers and perspective to the questions was received by both of the Finnish Food Trade Associtaion’s respondents. (See appendix for more detailed interview questions) We executed the interview questions fairly simple for getting straight forward answers to the research questions. With the interview questions we wanted to understand the main criterion for getting a new product into the grocery store for sale from both grocery store and decision maker’s perspective. Moreover, the business model related questions for interviewed person were there to support the annual reports and public statements found from other sources. Also, the annual reports were great sources to understand the culture, values and strategies of Schain and K-Chain and thus the bigger picture. Finally, the interviews brought depth and real life opinions for this particular case. After this Baba Foods’ data was collected from their business plan (2014) together with information gathered by open interviews and discussions with the shareholders. The information

Table 1: Business Model Canvas of K-Chain Table 2: SWOT of K-Chain Table 3: Business Model Canvas of S-Chain Table 4: SWOT of S-Chain Table 5: Business Model Canvas of Lidl Table 6: SWOT of Lidl . Table 7: Baba Foods' retailers (B2B customers) Table 8: Compatibility between grocery retailers and Baba Foods (new food manufacturer) List of figures